Inequality in tax evasion: the case of the Spanish income tax

Purpose: the purpose of this paper is to estimate tax evasion and its impact on progressivity, redistribution and the measurement of inequality, using microdata from the Spanish income tax for 2001-2004. Design/methodology/approach: the approach follows Feldman and Slemrod (2007) by exploiting the relation of charitable donations with the composition of income but introduces two methodological innovations, which could be useful for further studies: correction for sample selection with a Heckman two-step setting and the calculation of different evasion rates for top incomes with an interaction term. Findings: evasion in capital incomes was significant throughout these years. Financial incomes were reported at around 50-70 per cent of their real value, with the lowest estimates corresponding to the top decile. Revenues from fixed capital display similarly low compliance rates for the top 10 per cent. Tax evasion in self-employment incomes (direct assessment) is estimated at 20 per cent for 2001. Mostly because of a composition effect, this means that fraud was higher at the top of the income distribution, thus having a regressive impact. Inequality statistics and top income concentration estimates should, therefore, be revised upwards. Originality/value: this is the first paper to estimate the distributive impacts of tax evasion in Spain, and one of very few internationally.